October 15, 2008

The True Cause of the 'Mortgage Meltdown?'

To find the beginnings of this mortgage meltdown and credit crisis, perhaps we should go all the way back to the first person who enclosed a piece of land and called it theirs?

I found this piece of Uncommon Wisdom from Jean Jacques Rousseau (1712-1778):

The first man who, having enclosed a piece of land, thought of saying 'This is mine' and found people simple enough to believe him, was the true founder of civil society. How many crimes, wars, murders; how much misery and horror the human race would have been spared if someone had pulled up the stakes and filled in the ditch and cried out to his fellow men: 'Beware of listening to this imposter. You are lost if you forget that the fruits of the earth belong to everyone and that the earth itself belongs to no one!'

It's an interesting idea in a Marxist kind of way. It only works if everyone agrees on and respects what is "fair."

I don't see how you have an economy without the concept of land ownership. After all, economics is based on scarce resources that result in a supply and demand. Land is a scarce resource, their is only so much, so there is a need for value and ownership for a functioning economy.

I agree. Rousseau's thoughts highlighted in this post are quite romantic, if not arguably Marxist, as you say.

As with the greatest of philosophical thought, we are able to pause to think for ourselves, which is why I resist the temptation to add many thoughts of my own in posts like this; but simply ask questions so that others may freely form their own thoughts...

Perhaps this post will have us realize that there is not a better alternative to capitalism...

There are two questions here: the ego and its need for consumption. And the comparison between individual abilities and needs versus those of society.

When an individual produces more for a society through fruits of his intellect and labor, two things should happen:

1) His responsibilities within the society should be increased so that he can maximize society's output.

2) He should be rewarded more for his increased output.

It is important for this contract between the individual and society to exist, otherwise an unfairness is born to either side.

Property is merely one form of capital. In feudal society, it was the primary form, more important than gold. But now, we are able to convert land to cash to goods and services. In fact, it is any form of capital or stored value that we are protecting.

Meritocracy is a great societal ideal. We want the geniuses who can drive productivity to deliver more output for less input to control more.

We want to reward innovation. Capital labor is consumed in pursuit of innovation. Thus, when it is successful, its creators should enjoy the rewards.

Capitalism respects the above reward system. Unfortunately, there are times when society tends to fool itself. In the subprime bubble, we wrongly believed that financial innovation could eliminate risks, and not just redistribute them. Everyone from Wall Street financial engineers, to debt traders, to investment bankers and executives, to credit investors who bought CDOs and SIVs, to the home buyers whose homes rose due to the availability of credit and low-interest rates participated in this system, to the real estate brokers, appraisers, and mortgage brokers who financed them (and back to the beginning). There were millions of participants in this formerly benign and now vicious circle.

In essence, we rewarded those who did not create and must now face the consequences.

We also believed that as a nation, we could consume more than individuals from other nations, even though we produced less. This will also come to haunt us. The invisible hand rewards and punishes. The fact that we as a society are suffering is only proof that capitalism does work. There are no free lunches, and using government to soften the landing adds a tax on future creation. If we want to benefit from the economic gains of capitalism, we must be willing to lose a bit once in a while.

A little rambling, I know. I'm still collecting my thoughts on the matter.

In the early days of Israel democratic Socialism was the ruling system. The Kibbutz was the ultimate expression of this ethic.

In those days a person who was somewhat richer than his neighbor was considered "better off" but not a "better person".

Sadly that has disappeared as consumerism, emulating America, has become the norm.

There is little doubt that the change to a free market economy from a completly managed economy has worked wonders in raising the standard of living in Israel for the whole country.

Still there are enough controls in force that have seemingly helped Israel avoid the excesses that have created this global crisis.

In the end it comes down to responsible leadership. America has been badly served by leaders in all spheres - politics, business, finances and media.

Capitalism has to evolve so that it can serve the needs of all segments of society. In America fear of using the "S" word has effectively stifled any meaningful debate on this subject. Instead we have made a god of "profit for the sake of profit".

Now the unthinkable has happened and the State becomes the lender of last resort.

Maybe out of all of this will come a better understanding of the need to adjust the norms of society so that excessive consumption will not be valued more than other worthwhile human activity such as family and justice.

Great blog you got here. I love how the design and writing and everything connects and flows so well.
As per this post, I would say there is something in the idea of the noble savage where the land is anyone's and they take only as needed.
However, most societies have had land ownership in some form or another. Even if it was only with the ruling class.
As always, good food for thought...

i agree with jeremy. Great blog you got here. Even I loved how the design and writing and everything connects and flows so well. Why did the mortgage market melt down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be?
The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percentage increase of foreclosures and at the same time.
source: http://www.mortgagefit.com
Nor is it consistent with the “nasty subprime lender” hypothesis currently considered to be the cause of the mortgage meltdown. Instead, the important factor is the distinction between adjustable-rate and fixed-rate mortgages. This evidence is consistent with speculators turning and running when housing prices stopped rising.

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